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They're actually misunderstanding orthodox economic theory. EMH and CAPM doesn't say that it's impossible to run an outperforming mutual fund over many years.
by hntrader 6y ago
They're actually misunderstanding orthodox economic theory.
EMH and CAPM doesn't say that it's impossible to run an outperforming mutual fund over many years. All it says is that it's impossible to do so in expectation. Note that this is a statistical property pertaining to the law of large numbers. Nowhere in economic theory does it preclude a number of lucky outperformers, which is consistent with what we observe in reality (ie that there's a huge number of outperforming funds, and an even larger number of underperforming ones).
A finance professor would say "yes, there's hundreds of outperforming funds out there, likely some combination of luck and survivorship bias."
- sudosysgen 6y agoI am aware of that definition. It is also unfalsifiable. The only way to measure that is to take the average, but by definition for every market winner there is a market loser, so on average of course the return of the market will be.. . The average return of the market. The efficient market hypothesis and the idea of efficient markets in general is not supported by evidence.
- Dylan16807 6y agoThe number of consistently lucky participants drops exponentially over time. For a certain level of luck, and a certain threshold of proof, you can prove whether or not there are participants that know how to beat the market.
- hntrader 6y agoIn principle yes but in practice it's very difficult to postulate an accurate null hypothesis sampling distribution from which trades are drawn. In a roulette game, each outcome is drawn from the same, well understood distribution, so we can easily calculate the probability that a sequence of outcomes is observed when the null hypothesis distribution applies. In trading this is much harder, given the null hypothesis distribution is unknown and hard to estimate, and trades aren't i.i.d. since regimes come and go and therefore the luck of a specific style can be autocorrelated over a number of years. Trades are also correlated in the cross section through betas. I'm going to go ahead and say that it's an impossible task if we're dealing with 10-20 year timeframes and the fund had a low frequency style. It's just way too easy to be lucky over a course of multiple years. All you really need is 1 lucky call combined with index tracking on the remaining capital to outperform ("overweight AMZN").
- sudosysgen 6y agoThere have been people that beat the market on average all their life. I'm sure you could find many for any reasonable timeframe. Even if one can beat the market there is simply no way to tell the statistical distribution that would generate from a random distribution.
- Dylan16807 6y agoYou can beat the market on average with one good investment and a whole lot of doing nothing. So you can't prove much about very passive investors. But if someone is making a 2:1 payout decision every month, and manages to be right 75% of the time, you can be quite sure it's not luck.
- sudosysgen 6y agoSure, but that is way beyond the threshold of the EMH. And it might just be that making frequent decisions is not a good way of exploiting market inefficiency.
- Dylan16807 6y agoYou can set your own threshold that's not way beyond. The point is that it's not unfalsifiable. There are pretty reasonable scenarios where you could find a group of consistent market-beaters and falsify it. If there aren't enough exploitable inefficiencies in an entire career to make that proof, then that's an interesting data point all on its own.
- sudosysgen 6y agoThere are certainly people who made their career by beating the market consistently. Many, in fact. What you're requesting is that this happens in a specific way. That specific way might not be the way that is optimal.